Encryption Hedging Fund Market Research: Expansion in Scale, Family Offices and High Net Worth Individuals Become Market Makers

A recent survey report revealed the development status of cryptocurrency Hedging funds. The data shows that the asset management scale (AUM) of these funds significantly increased in 2019, jumping from $1 billion at the end of 2018 to $2 billion.

In the overall performance of 2019, fully delegated long funds performed the most outstanding, with an average return of 42%. It is noteworthy that family offices and high-net-worth individuals became the main sources of investment for these funds, accounting for 48% and 42% respectively.

An industry expert pointed out: "Since the outbreak of the COVID-19 pandemic, we have observed a general increase in people's interest in encryption."

Fund Establishment Time and Strategy Analysis

Research shows that by the first quarter of 2020, there were approximately 150 active encryption hedging funds, with nearly 63% established in 2018 or 2019. The activity of fund establishment shows a high correlation with Bitcoin price trends. The surge in Bitcoin prices in 2018 seems to have been an important factor driving the establishment of cryptocurrency funds. However, as the cryptocurrency market began to decline at the end of 2019, the number of newly established funds also decreased accordingly.

The report categorizes cryptocurrency hedging funds into four main types:

1. Full power of attorney to go long
2. Full authorization to go long/short
3. Quantitative Fund
4. Multi-strategy fund

Among them, quantitative funds are the most common, accounting for nearly half of the market share. The other three strategies each account for about 17-19% of the market share.

Composition and Scale of Investors

The survey shows that family investment institutions and high-net-worth individual investors make up the majority of investors in encryption hedging funds, accounting for as much as 90%. In contrast, pension funds, foundations, or endowment funds have very low participation. Traditional venture capital funds and funds of funds also hold a small proportion in cryptocurrency investments.

The median number of investors in these funds is 27.5, and the average is 58.5. The median average investment size is $300,000, and the average is $3.1 million. About two-thirds of encryption hedging funds have an investment size of less than $500,000.

In 2019, the global assets managed by cryptocurrency hedging funds were estimated to exceed $2 billion, doubling from $1 billion in 2018. The distribution of asset management size shows a Matthew effect, with a few large funds managing the majority of the assets.

Performance and Investment Strategy

In 2019, the median performance increase of crypto hedge funds reached 74%, far exceeding the -46% of 2018. Funds with different investment strategies performed differently, with multi-strategy funds having a median performance of 15% in 2019, lower than the quantitative (30%), discretionary long/short (33%), and discretionary long (40%) strategies.

It is worth noting that Bitcoin's 92% increase in 2019 outperformed all encryption hedging funds. This may be related to the bear market of 2018 and the failure to grasp the market uptrend in 2019.

In recent years, the encryption lending market has further developed, with many trading platforms beginning to offer lending and margin trading services. Flash loans and interest rate arbitrage trading have become increasingly common. The diversification and increased liquidity of the derivatives market have made it easier for encryption hedge funds to hold short positions and execute more complex investment strategies.

The survey shows that approximately 48% of the surveyed funds have short-selling strategies, and 56% use derivatives. In the options and futures markets, about one-third of the funds participate in trading. It is expected that in the coming years, as regulated encryption futures products increase, more funds will enter this field.

In leveraged trading, 56% of cryptocurrency hedge funds used leveraged trading in 2020, an increase from 36% in 2019. However, the proportion of funds that actively used leveraged trading was only 19%.

In the future, it is expected that more encryption Hedging funds will be allowed to use leverage in their investment prospectuses, but the difficulty for brokers to obtain debt financing may increase. Additionally, the practice of obtaining leveraged exposure through derivative instruments may become more common.